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The Zurich Axioms

January 25, 2012 at 12:08 pm

I first learned about The Zurich Axioms by Max Gunther in the daily Worden Report when Don mentioned it among his favorite trading books a few years ago. Soon after, I picked up a copy and found it was indeed packed with some great insights – enough to be a must-have trading book.

There are 12 major axioms highlighted in the book, with a chapter devoted to each, as well as 16 minor axioms.  It’s a relatively short book at only about 123 pages, but the “Rules of Risk and Reward Used by Generations of Swiss Bankers” offers no shortage of wisdom and insights for any trader or speculator.

Without disclosing all of the Axioms, I’ll summarize two of my favorites.

Always Play for Meaningful Stakes.

This minor axiom highlights the importance of trading with enough size for it to matter.  This goes beyond the learning stages in which a developing trader needs to hone his skills and not fixate on the money.  Rather, playing for meaningful stakes is about getting over the fear of getting hurt in such a way that when a play works, it’s well worth the risk taken.

A story is told in the book about the oil tycoon J. Paul Getty, who grew up rich, but once he became an adult he was sent out on his own.  Wanting to enter the oil business, he shunned various opportunities to invest $50 in the early 1900’s in favor of betting nearly his entire savings of $500 on an oil lease he felt was more promising.  After paydirt was hit, he sold his holdings for $12,000 just a short time later.

Getty mentioned that if he had not struck oil, the $500 would have hurt, but that he could have found a way to save that amount back up again.  He was quoted as saying “it seemed to me I had a lot more to win than to lose.”  That’s playing for meaningful stakes.

As a trader, it’s not about walking a tightrope where bankruptcy is the result if you slip.  It means you don’t nickel-and-dime your way throughout the entire year if you want to get somewhere interesting.

Optimism means expecting the best, but confidence means knowing how you will handle the worst.  Never make a move if you are merely optimistic.

What an excellent reminder for traders!  Gunther makes the point that without some level of optimism, one cannot trade to begin with.  However, there is general optimism and there is specific optimism.  According to Gunther, it’s the venture-specific optimism which can become dangerous if you allow it.

The latter mention of what true confidence is just cannot be ignored here.  Do you know how you will handle the worst?  If you do, then you’ve got arguably the most difficult element of a trading plan already in place – the adverse exit.  The ability to fail gracefully in trading – over and over – is what will ultimately define how long you can stay in the game.  Your success may eventually be tremendous, but if you’re unable to handle losing the right way, you’ll be taken out long before the big wins can ever come along.

My advice? Pick up a copy of The Zurich Axioms and get a pen ready to mark up the margins and underline key points.  It’s a quick read and one you’ll return to often.

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

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6 Must-Have Trading Books

November 30, 2011 at 9:09 am

I was asked this week about the best trading books from a trader who expects to have some downtime this winter due to his seasonal business.  Here’s the list I sent him.

Market Wizards, New Market Wizards, Stock Market Wizards, all by Jack Schwager. These are interview-style books loaded with insights from traders of all styles and in all markets.  Must-have books.

Reminiscences of a Stock Operator by Edwin Lefevre. This classic is a memoir-type book modeled after Jesse Livermore, one of the most famous traders ever. Underline the lessons that stand out to you, but it’s full of wisdom even though it’s approaching 90 years old.

The Zurich Axioms by Max Gunther. A list of rules from Swiss bankers which is apply for any trader. A little harder book to find, but a great one worth reading multiple times.

How I Made $2 Million in the Stock Market by Nicolas Darvas. A true-life account (published in 1960) of a guy who made every mistake imaginable before finding his winning system. It’s got a lot of great lessons and it’s one I’ve read numerous times for that reason.

All these are great aids for traders, they are not how-to books but rather the kinds of books with lessons that last. I’d recommend them all!

UPDATE: Somehow I left off the newest book worth reading, which is One Good Trade by Mike Bellafiore.  I reviewed it earlier this year and have re-read it since, it’s that good.  Somehow in writing this post, I was fixated on older books but this should have been a post on 7 Must-Have Trading Books!

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

Follow TheStockBandit on Twitter or get our free newsletter to keep up!

One Good Trade

January 21, 2011 at 12:23 pm

one-good-tradeI was sent a copy of One Good Trade by the author, Mike Bellafiore, longer ago than I care to admit.  (In fact, Bella, please forgive me for taking so long to get around to reading it!)  I will say though, once I picked it up, I only wished I had started reading it sooner.

Mike’s been a trader for just a little longer than I, so a few of his earliest experiences were before I got into trading back in 1998.  From there, I really enjoyed his reflective tone regarding his trading career, experiences, mistakes, lessons, and successes.  His honesty was refreshing, and I enjoyed seeing how he adjusted his approach throughout the market changes over the years (as we all must) in order to survive.

But beyond the nostalgia, One Good Trade was also full of wisdom.  Mike’s personal trading experience was at the heart of the lessons he teaches in the book, but his experience and insights are compounded by those of the many traders at his prop firm.  I started out in a day trading office – a very similar environment where I was surrounded by dozens of other traders for my first few years.  I can tell you from my own experience, Mike still learns plenty from the other guys in his office.  And it shows in the lessons he relays from having trained others over the years.

I want to hit 8 highlights I found in this book in order to give you a glimpse of what’s inside.  Even though I’ve cherry-picked a few of my favorites to share with you, this is still a book you need to read if you’re an active trader (so go pick up a copy!).

1.  Trading – like sports – is performance based.  Athletes, like traders, understand that a little talent isn’t enough…it takes hard work too.  Some days (or weeks) are better than others, so it’s important to show up ready to play, both physically and mentally.  Bella’s recent example of MLB great Trevor Hoffman gives an excellent example of one such mental exercise for peak performance.  Getting good rest is another way to ensure you can be at your best on a regular basis.

2.  Maintain lists of the setups which work for you and those which don’t.  This sounds so obvious, and yet have you ever done it?  Trading responsibly includes knowing what works for you and which setups tend to fail or shake you out prematurely.  Understand which is which, and as Gartman says, “do more of what is working, and less of what is not working.”

3.  The market doesn’t care what you wish – so you must always adapt.  It’s harsh truth, but something each of us needs to hear from time to time.  Mike goes on to say that the market also doesn’t reward the trader seeking lazy trades, so be creative.  These go hand-in-hand for the trader who is willing to adjust his approach as the tape requires.

4.  You choose your attitude.  This can be said for any endeavor, including trading.  Go tell Lance Armstrong that attitude doesn’t matter.  In trading, Mike reminds that you can complain and make excuses, or you can compete (and find ways to use current conditions to your advantage).  There will always be obstacles to overcome (HFT’s, head-fakes, etc.), but never make excuses.  Poor traders blame, so don’t be one of them if you want success in trading.

5.  Make the most trades with the most size during the trading periods that statistically are most profitable for you.  Another seemingly obvious statement, yet one which most traders simply don’t understand.  You don’t have to be a statistics nut to appreciate the fact that for your trading style, there are times when you need to be active and times when you need to sit and wait.  Find out when to do which, and you’ll stop giving back gains.

6.  Work on your visualization abilities regularly. This is the best way to get better, best way to grow, best way to overcome challenges, and the best way to train your brain in the way you want to respond in any situation.  Mike works hard with his professional traders to not only review their trades after the fact, but he harps on the importance of mentally rehearsing how to respond to various situations.  That way, when the real deal comes along, the right preparation has been done.

7.  Be coachable.  Traders with a stubborn attitude or who don’t listen simply won’t improve, whether it’s what the market’s trying to tell you or something someone else is teaching you.  If you aren’t a listener, you’re going to either stay stubborn (and lose) or you will take the long road to improvement.  Those who are coachable are more able to place their ego aside and move forward, rather than adapting to what the market’s telling you (see #3 above).

8.  Trading is all about skill development and discipline.  Great traders obsess over doing their job, which is to make One Good Trade at a time.  They always live to fight another day, and they’re continually developing their skills so they can trade any market which comes along.  Discipline is shown both at their desk and away from it, and as a result, their hard work isn’t sabotaged by destructive habits.

Bottom line:  Fantastic book, and it’s not to be missed if you’re a trader who is passionate about improving.

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

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Reminiscences of a Stock Operator – Annotated Edition

February 24, 2010 at 11:07 am

Trading books are among my favorite to read, and I’m always on the lookout for a good one.  The ones I like the most aren’t of the how-to nature, given that I’ve been a full-time trader for so many years.  Instead, I really like those that get inside the heads of great traders.

I’ve pointed out my favorite reads in this category before, and that hasn’t changed.  I still re-read them each year, and I either pick up new lessons or am reminded of timeless lessons each time I go through them.  It’s a good investment of my time.

Perhaps at the top of the list is Reminiscences of a Stock Operator by Edwin Lefévre.  My original copy is marked up from cover to cover where I’ve underlined portions of the text and made my own notes in the margin.

It’s based on real-life trader Jesse Livermore, but technically the book is fictional.  Having read several other books by and about Livermore, this one does chronicle much of his trading past in an accurate fashion.  However, I’ve always wondered about the facts behind the book and have wanted to know more.

So, when I was asked if I’d be interested in receiving a copy of the new Annotated Edition by Jon Markman, I jumped at the chance.  After having read through it in the past few weeks, I’m impressed with it to say the least.  Here are a few of my favorite takeaways from the book:

  • Foreword by Paul Tudor Jones. Need I say more?  A Market Wizard weighs in on why this timeless classic is among his favorites, including an in-depth Q&A in the back of the book.
  • How Lefévre got Livermore’s story. I had wondered how Lefévre told Livermore’s stories with such accuracy and keen insight, and it’s clear their combination created a better work than either of them could have told individually.
  • Explanation of Livermore’s ‘hunches.’ The book helps explain how a pro like Livermore can act boldly when he felt the urge to go big, based on pattern recognition and his experience as a tape reader.
  • Selected quotes by chapter. Dozens of snippets from the book which could each be taped to my monitor on any given day, such as:  “Remember that stocks are never too high for you to begin buying or too low to begin selling.”
  • How Livermore manipulated stocks. It was interesting to see how Livermore shifted from a trader to an ‘operator.’  It’s an art form how a whale like him can accumulate and distribute large positions, and additional light was shed on how and when he made his big moves, minimizing slippage along the way.

This new Annotated Edition is filled with side notes, insights, and the historical context in which the events took place – right alongside the original text of the book.  Cultural settings are explained, and economic and political circumstances are discussed.  Backgrounds of key characters are highlighted, helping to further clarify each scene.

The photos and detailed descriptions of the conditions under which Livermore was trading also shine considerable light on each circumstance.  As a result, I not only learned some interesting history of the market, but along the way I also gained some valuable, timeless insights to apply in today’s trading environment.

Thank you Jon for sending me a copy of the book!  And in case some of you haven’t read this classic, pick up a copy of it today – I have no doubt it’ll quickly become your favorite.

Trade Like a Bandit!

Jeff White

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The Complete Turtle Trader

April 24, 2008 at 7:35 am

As much as I love trading, it’s no coincidence that I frequently have my nose in a trading-related book. I stay away from the how-to books these days, sticking primarily to interview-style books, conceptual trading books, or just ones which tend to tell a good story.

One benefit of writing a blog is the occasional opportunity to check out a book straight from the author, so when Michael Covel offered to send me a copy of The Complete Turtle Trader, it was an easy decision to respond with a resounding “yes.” Now, I’m ashamed to say that it has taken me some time to get to this book (my apologies, Michael!), but once I was able to start reading it, it didn’t take me long at all to finish it.

I quickly realized that The Complete Turtle Trader contained a little bit of everything I like in a trading book. There are numerous quotes from turtle traders and others surrounding the famed experiment which give portions of it an interview feel, there’s plenty of discussion on the concept of the turtle trading method and objectives, and to see the puzzle pieces get put together the way Michael did it certainly tells a good trading story!

About The Turtle Traders

The great turtle trading experiment began in 1983 when Richard Dennis and William Eckhardt decided to take a friendly wager to the next level: they recruited and trained non-traders to see if they could become successful traders using their system. People from many walks of life ultimately joined the team, and the legend began. Dennis and Eckhardt combined for quite a team, with Dennis being described as a pure trader with an incredible feel for market psychology, while Eckhardt was a mathematician who calculated the formulas behind the turtle method. Their decision to hire trainees proved to be extremely successful, and the tale has been told in various ways since then.

Reader Benefits & Impressions

As a full-time trader, I’d certainly heard of the experiment, so I was eager to see what The Complete Turtle Trader had to say. As I progressed through the book, I learned a great deal more about the entire process than I had ever realized before. Amounts made and lost, drop-outs and primadonnas, just what the turtles were doing and trading, and oddly, how much time they spent just letting their positions run.

Here are a few parts of the book which stood out to me:

* Richard Dennis, who funded the experiment, felt that money was purely a way to keep score in the game, which is likely a big part of why he was so successful – his emotions didn’t interfere with his trading process. Interestingly, Dennis was able to successfully blend his bold approach with a healthy dose of respect for the market – two traits which nearly oppose each other but offer the trader two invaluable tools for success.

* The initial training actually began with managing risk. That’s not what one might expect from this famous bet/experiment known for making huge amounts of money, and yet it supports the notion that great traders know how to lose properly.

* Aggressive trading can pay off big, but knowing when to stomp on the gas is the part that many traders miss. Covel mentions that Dennis would go big when he sensed he had an edge, implying that he not only varied his position sizing depending on conditions but also that perhaps he traded much smaller when he lacked conviction. How much difference would it make to your trading results if you hit your favorite setups hard?

* Staying in the present tense and making the best decision “now” will lead to long-term success. Eckhardt knew that how you arrived at your current situation and what you choose to do going forward were separate variables, and he wanted every trader to make the proper decision at all times based on what their rules specified. Covel mentions that Eckhardt “wanted the turtles to literally trade as though they didn’t know what their entry price was.” That speaks volumes to trading your plan and having the discipline to stick with it while ignoring your recent results.

* No guts, no glory. Those who succeeded in the program had undeniable confidence and conviction in their trades, yet balanced that perfectly with a respect for risk. At the end of the day though, the best traders were those who took every opportunity which came along to turn a profit, setting aside any concerns for failure. Courage and determination were far bigger than the rules when it came down to being successful. I’m left with the distinct impression that those who were right frequently with their trades did not make as much as those who nailed the occasional trade with size and held onto it until the trend ended. Much has been made of the Turtle Trading Rules, and yet following them was only a part of how the turtles stayed in the program. Covel states that “if they did not exhibit…a ‘walk-off home run’ mentality every day, they would fail.” Each of them had to have a huge amount of confidence and a major drive to succeed in order to prevail, yet possess the ability to keep their ego in check.

Bottom line: The Complete Turtle Trader is an excellent book which offers loads of wisdom while keeping your interest. The market requires that we’re constantly learning, and this book provided me with a few new lessons while serving to remind me of numerous other valuable trading insights.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Swing Trading, Turtle Trader, Investing[/tags]

Timothy Sykes: An American Hedge Fund

July 4, 2007 at 3:26 pm

I love to read trading books, so I’m always pleased to have the opportunity to do book reviews when writers offer to send me a copy of their book. Recently I was asked by Timothy Sykes if I would be interested in reading and possibly reviewing his upcoming book, An American Hedge Fund. I obliged, and soon after I found an “uncorrected proof” copy of the book sitting in my mailbox. I was pleasantly surprised to also find a very nice handwritten note by Timothy thanking me and offering an open invitation to contact him regarding any questions I may have. That set the stage for what was to become a very good read.

With a hectic schedule like most of us have, I found occasions to work my way through the book over the course of the last couple of weeks, but as I got to it I found it was a real page-turner. Once I completed it a few days ago, my plans were to post my review this weekend, but when I saw my friend Charles Kirk posted his review yesterday and then Timothy appeared on Fox News today, I figured it was time to stop dragging my feet!

I had seen Timothy on CNBC (he was the first to bring models to the show – nice touch Tim!), in Trader Monthly magazine, and he also stars in Wall Street Warriors on MOJO. He definitely was getting some press, so I was interested to see how he had gotten there.

This was a book I thoroughly enjoyed. In fact, not since Dumb Money have I found a trading author’s sarcastic humor and no-holds-barred honesty regarding his trading decisions, conquests and faults so authentic and compelling. I related to so much of it as a trader, was inspired by his successes, and was reminded of important lessons through his failures. Timothy’s style of writing kept me entertained and intrigued as to what would happen next, plus I kept getting waves of nostalgia whenever he’d mention flash-in-the-pan stocks of the 4-letter variety which I’d also traded in recent years. It can be fun to dabble in the story stock of the day, and fading those moves in micro-cap stocks just happens to be Timothy’s specialty as a trader – he’s the first I’ve known to do so well with such a strategy.

Timothy’s story takes you through the complete transition from his $12,000 bar mitzvah money all the way to his multi-million dollar Cilantro hedge fund, chock full of juicy details along the way. The P&L numbers keep on getting bigger, and he keeps nothing in reserve when it comes to his feelings after each individual victory or defeat. You’ll relate as I did not only to the highs and lows of his trading, but to the calculated (and sometimes uncalculated) risks he takes, the disciplines he learns to employ, the pain his weaknesses occasionally cause, and even the burnout he sometimes encounters.

His audited returns are certainly impressive, but he gives the reader a very clear glimpse of just what it takes to get there. Timothy details the lifestyle of a big-city trader, the journey of building a hedge fund when you’re a small fish, how to adapt to changing markets, and how to deal with the everyday challenges and thrills of just being an active trader.

Even though my copy of it was free, I found An American Hedge Fund to be an excellent book which has a lot to offer any self-driven investor or trader. Watch for it in stores or at Amazon October 1st this fall and pick up a copy for an entertaining read!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Honor Thy Stop

April 17, 2007 at 11:57 am

Pit Bull by Marty Schwartz

There are a handful of trading books which I have read many times and keep returning to on occasion, including Reminiscences of a Stock Operator, and the Market Wizards series by Jack Schwager. I would also recommend one other book which is written by a Market Wizard, Marty Schwartz, which is called Pit Bull.

Schwartz writes candidly about his history as a trader, including the struggles he went through for many years before becoming one of the biggest and most successful S&P 500 futures traders that has been seen. One portion of Pit Bull is called “Honor Thy Stop,” and it contains some excellent thoughts regarding the use of these safety nets in trading. Here are several of his comments on the topic of stopping out of trades. I found these very useful, so you might relate to them as well. I have a few comments thrown in there too:

“You’re the only one who’s emotionally involved in your position.”
How true! The market really doesn’t care about what we’re feeling, which is all the more reason to approach trades with more logic than emotion.

“Taking a loss is hard to do because it’s an admission that you’ve been wrong. But in the market, being wrong some of the time is part of the game.”
It’s how we manage our wrong trades that will keep us on track.

“That’s the problem with amateurs, they only have half a plan, the easy half. They know how much of a profit they’re willing to take, but they don’t have the foggiest idea how much they’re willing to lose……Their plan for a position that goes south is, “Please God, let me out of this and I’ll never do it again,” but that’s (false), because if by chance the position turns around, they’ll soon forget about God. They’ll go back to thinking that they’re geniuses…”
It is amazing how being on the wrong side makes us repent for all of our trading mistakes, but when we’re right we want all the credit.

“What most people fail to realize is that while you’re losing your money, you’re also losing your objectivity. The market…..doesn’t care about you. That’s why you have to put aside your ego and get out.”

“…a stop is an investment in self-preservation because if you’re wrong, it saves you those extra dollars that you’d lose by hanging on to a losing position. It keeps you from digging the hole deeper and it makes it easier for you to climb back out.”
This is a great way to view the use of stops. They are safety nets for our well-being as traders, so why not use them.

“The more you lose in a trade, the less objective you become. EXITING A LOSING TRADE QUICKLY CLEARS YOUR HEAD AND RESTORES YOUR OBJECTIVITY….. By preserving your capital through the use of a stop, you make it possible to wait patiently for a high-probability trade with a low-risk entry point.”

Of course the market is always there to remind us, but it’s still good to have Schwartz’s input on the subject to remind us that a big part of what made him great was his ability to contain losses when they occurred. In fact, Schwartz even states in the book, “I can tell you how I became a winner – I learned how to lose.”

So the next time you’re faced with the opportunity to honor thy stop, remember the success of Schwartz and know that while you’re admitting defeat on that one trade, you’re simultaneously adding objectivity to your next entry.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]